The House of Commons Work and Pensions Committee called for a "fundamental redesign" of the Employment and Support Allowance, and said that a number of changes should be introduced immediately to ensure an improved service for claimants, who were suffering "considerable distress and anxiety" under the existing scheme.
Contractor Atos announced in March that it was withdrawing early from its contract to conduct assessments of ESA claimants designed to establish whether they are fit for work or could manage "work-related activity" intended to help them prepare for a return to employment. A replacement is expected to be appointed early next year.
The company had become a lightning rod for dissatisfaction among disabled people required to undertake Work Capability Assessments (WCAs), though the committee stressed that it was the Department for Work and Pensions, and not Atos, which made decisions on eligibility.
The report found that ESA was "not achieving its purpose of helping people in work in the short to medium term to move back into employment".
Committee chair Dame Anne Begg called on Mark Harper, who was appointed minister for disabled people in last week's government reshuffle, to respond positively to the report's recommendations.
Dame Anne said: "We know that the redesign can't happen overnight, but the current system needs to be improved now, because it is using claimants considerable distress and anxiety."
Richard Hawkes, chief executive of disability charity Scope, said: "Reforms must go deeper than simply changing the provider of fitness-to-work tests.
"The test should be more than an exercise in getting people off benefits. It should make sure disabled people get the specialist, tailored and flexible support they need to find and keep a job."
Leslie Morphy, chief executive of homelessness charity Crisis, said: "If you are ill or disabled you need proper support to rebuild your life.
"Yet this report shows the system that wrongly assesses people as fit to work is instead failing them.
"It causes stress and worry by placing unrealistic expectations on people, leaving them at risk of sanctions, severe hardship and sometimes even homelessness."